Key Takeaways:
- Reliable retirement income starts with understanding your spending needs and matching essential expenses to dependable income sources like Social Security, pensions, and annuities.
- A thoughtful withdrawal strategy that coordinates investments, taxes, and account sequencing can help retirement savings last longer and reduce financial stress.
- Regular reviews are critical because inflation, healthcare costs, taxes, market conditions, and life changes can significantly impact retirement income over time.
Those who are new to the retirement phase of their lives are usually met with a sense of uncertainty, if not panic, as their stable income from employment has come to an end. What will they do to provide for their lost employment income for the next 20-30 years?
Fortunately, your retirement income can be covered by several income sources. Social Security, company retirement plans, personal IRAs, and perhaps annuities will help you provide income for your retirement years.
Start With the Spending That Needs to Be Covered
You are unique; using numbers that apply to the masses may be a mistake. Put a pencil to paper and determine what YOUR spending needs are.
It is best to categorize your expenses into 2 columns: mandatory expenses, such as food, housing, healthcare, taxes, etc., and non-mandatory expenses, such as travel, gifts, and other lifestyle expenses.
Core Spending
Mandatory expenses mentioned above need a stable source of income. Social Security, pension income, and annuities can fit the bill.
When comparing your mandatory expenses against your dependable/stable income, make note of any shortfall between the 2 columns. Any shortfall would be covered by withdrawals from your other investments, cash reserves, etc.
Flexible Spending
Next, identify non-mandatory expenses that can vary, such as travel, dining, gifts, home projects, and entertainment.
During times of weak investment markets, non-mandatory expenses can be put on hold until investment markets recover.
Build the Income Foundation First
Social Security is usually the foundation of any retirement plan as it provides a lifetime, inflation-adjusted income.
Pension income, though not very common today, can help support your mandatory expense situation.
Annuities can also be used to cover mandatory expenses, as long as you are aware of any restrictions regarding the withdrawal scenario.
Cash reserves can help cover near-term withdrawals and unexpected costs without forcing investment sales at an unfavorable time.
Use Investments to Support Long-Term Income
Your stock market investments are to provide and sustain your need for long-term income. It helps combat the effects of inflation.
Your investments should be structured so that they coincide with the need for money. Some call this “time segmentation.” You are aligning your investments with when they will be needed to fund your expenses.
A well-balanced investment portfolio will help you reduce investment risk yet provide you with the income that you will need for the next 20-30 years while in retirement.
Cash and bonds should be used for short-term income needs, while stocks will provide the long-term growth and fight against inflation that you will need during your retirement years.
Rebalancing by reviewing your total investment portfolio is critical so that you always have enough cash for immediate needs and bonds for later years, followed by stocks for the longer term.
Create a Withdrawal Strategy Based on Your Actual Plan
Do not construct a withdrawal strategy based upon what you read or hear. You must construct it based upon your life, not someone else’s. What are your income sources? What are your total expenses? Is there an excess or a shortfall between the two?
Remember to be very, very concise when constructing your expenses.
Keep in mind certain variables such as: poor stock market returns, changes in inflation, longer life expectancy, higher healthcare costs, and any other changes in household spending.
A withdrawal plan should take into consideration the possibility of having to reduce your spending in severe/unexpected conditions. What would you do then?
Coordinate the Account Order
How you withdraw money from your various accounts can have a significant impact on the taxes that you will have to pay. Different retirement accounts have different tax consequences.
As an example:
Use cash reserves first for near-term spending needs and planned withdrawals.
Draw from taxable brokerage accounts when doing so can manage income taxes and preserve tax-advantaged assets.
Use traditional IRA or 401(k) withdrawals when income is lower, RMDs are approaching, or reducing future pre-tax balances may help.
Use HSAs strategically for qualified medical expenses, while also recognizing that after age 65, non-qualified HSA withdrawals are generally penalty-free but taxed as ordinary income.
Preserve Roth assets longer when tax-free growth, later-retirement flexibility, or beneficiary planning is a priority.
This is just an example, as a real-world scenario depends upon what types of retirement plans you own, as well as your tax bracket and other such variables.
Plan for the Risks That Can Disrupt Retirement Income
Should you start taking your retirement withdrawals when the investment markets are doing poorly, that can have an immense impact on the length of time that those assets will last.
Inflation is like cancer; it does not kill you overnight, but over longer periods of time, inflation can wreak havoc with your purchasing power. Inflation is insidious in the way that it can destroy your retirement plans if you do not keep a close eye on it.
Longevity risk, or the risk of living too long, can be catastrophic to your retirement plans just as inflation can. Will you outlive your money?
Healthcare costs can be staggering for most individuals. Have you accounted for such expenses?
Don’t forget about the consequences of taxes on your Social Security payments, pensions, IRAs, and any other taxable investment accounts.
Review the Plan as Retirement Changes
Like most things in life, expect changes. Retirement planning is not a one-and-done task. Your life changes, tax rates change, your health situation changes, and therefore, your plan from yesteryear will become obsolete.
Review on an annual basis whether what you are pulling from your retirement funds is reasonable and sustainable for the long-term. If necessary, make adjustments to make certain that you do not outlive your money.
Review your investment allocation on an annual basis. Do you have enough in cash for immediate needs and yet enough to provide the growth that you will need to provide yourself with income in the future?
Review your tax situation in light of any tax law changes or changes in your income.
Life is unpredictable, which means you need to be flexible with your retirement plan. Be prepared for the unexpected, as it will surely arrive at some point in your life.
Reliable Retirement Income FAQs
1. How much income do I need in retirement?
There is a common ratio being used to answer this question, and the ratio is: 80% of what you once needed prior to retirement is what you will need in retirement. That said, it is highly recommended that you put pencil to paper to determine what your expenses will be as a retiree.
2. What is a safe withdrawal rate in retirement?
Depending upon your age, anywhere from 4% to 6% is a safe rate to begin with. The longer you plan on being a retiree, the lower the percentage number should be. As you get older, you can increase the percentage rate that you withdraw as income.
3. How can I create retirement income without running out of money?
An effective method to help create retirement income that will not run out entails establishing 3 buckets of money. The first bucket contains 6-12 months of expenses in cash. The second bucket should contain 2-5 years of expenses in bond funds, and the last bucket has the remaining retirement assets in stock funds.
4. Which accounts should I withdraw from first in retirement?
You must withdraw funds from your retirement plans if you are required by law. The remaining accounts should be drawn from based on the most tax-efficient manner.
5. How can I protect my retirement income from market downturns?
Always keep a portion of your retirement assets in cash. This should represent 6-12 months’ worth of expenses in cash. Keep 2-5 years’ worth of retirement expenses in bond funds to help protect your money when the stock market declines.
6. How often should I review my retirement income plan?
At least once per year or whenever there is a significant change in your life. The key reason to review your retirement income plan is based on any change that occurs in your life.
Create Lasting Retirement Income
An experienced and qualified financial advisor can help connect spending needs, guaranteed income sources, investments, taxes, and future risks into one coordinated income plan.
Planning can test different withdrawal rates, Social Security claiming ages, account withdrawal orders, and market scenarios before decisions become difficult to reverse.
Your goal is to create income that feels dependable enough for today while preserving enough flexibility for a long retirement. If doing this on your own is too overwhelming, seek the assistance of a qualified, experienced retirement expert.
Let’s Discuss Your Retirement Future
For over 40 years, Retirement Solutions has been assisting women in viewing their financial future with anticipation rather than apprehension. We offer those interested a no-obligation, no-fee 15-minute consultation so that we can better understand your particular situation and whether we can be of assistance to you. Click the “Let’s Discuss Your Financial Future” link in the upper right corner of the Home page of the website.
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